What ramifications to vendor management do we see in regards to the Wells Fargo fine in the news recently?

The Wells Fargo and Chase actions generated a lot of attention. But in a way, they aren’t “new” news in the sense that RESPA Section 8 enforcement has been the Bureau’s focus. If you just look at the number of cases brought by the Bureau as a percentage of all its public cases, it’s close to a quarter of all their public enforcement actions. So the Bureau has been making enforcement in this area a priority.

Putting aside the particular facts of the Wells Fargo and Chase actions, I look at these as a reminder that regulators are going to be looking closely at all your relationships. Vendor management is one aspect of that but they are looking very much at compliance with specific consumer protection laws including the section 8 prohibitions on certain types of payments involving settlement services. What you need to know for all the people you are doing business with is whether your agreements with those individuals or entities are compliant with existing law and assuming they are, are you adhering to those agreements? Some of the other actions brought by the Bureau in this area have been very focused on whether the services that are called for in the agreement with the third party are actually being performed].

Note: This transcript has been edited from the January 2015 vendor management webinar for clarity and completeness.

Answered By: Ben Olson

Can you expand on why a live transfer is one to stay away from?

Online lead generation companies where the lead generation company has spoken directly with the consumer and then transfers the “Live Handoff” over to the Lender or Loan Officer (especially if the Lead Generation company is not licensed under the Safe Act in their respective state) is a huge concern for regulators in today’s regulatory environment. The regulators have indicated many of these companies are nothing more than unlicensed “mortgage brokers” who are operating in violation of the Loan Officer Compensation Rule that went into effect on Jan. 1, 2014 because the lead generation company is soliciting consumer information for loan products without a license. The CFPB has publicly stated they are concerned with this type of lead generation marketing tactic because consumers are prone to give out sensitive personal and financial information. Additionally the CFPB has stated that “live transfers” confuse consumers into thinking they are dealing directly with a lender when in fact they are not. In addition to Loan Officer Compensation issues there are a myriad of other compliance headaches (Fair Lending Act, UDAAP, Fair Housing Act, Telephone Consumer Protection Act, Telemarketing Sales Rule, privacy issues, CAN Spam Act, etc.) which make these types of “Live transfer” lead generation companies fertile grounds for regulatory enforcement action.

Note: This transcript has been edited from the March 2015 RESPA Section 8 webinar for clarity and completeness.

Answered By: Marx Sterbcow

Is the CFPB only targeting title agents or also underwriters?

The CFPB is an equal opportunity enforcement operation. They do not care how small or large you are as evidenced by Borders & Borders (three person law firm in Kentucky) or Wells Fargo. The CFPB has only publicly announced title agents thus far such as Stonebridge Title in New Jersey, TitleSouth in Alabama, and Borders & Borders in Kentucky. They have not yet announced any enforcement actions involving title insurers but I am sure at least one title insurer will find itself in a CFPB enforcement action.

Note: This transcript has been edited from the March 2015 RESPA Section 8 webinar for clarity and completeness.

Answered By: Marx Sterbcow

In your opinion, will the CFPB be going after the lead providers or also the company that bought the lead?

In my opinion the CFPB/FTC will target both the lead providers and the company that bought the lead. The CFPB has expanded UDAAP recently to include those who provided “Substantial Assistance” to a settlement service provider in connection with a mortgage transaction.

Note: This transcript has been edited from the March 2015 RESPA Section 8 webinar for clarity and completeness.

Answered By: Marx Sterbcow

What do you see as the biggest challenges for wholesale lenders in implementing TRID?

TRID presents a number of challenges to everyone: this rule really affects every party to a real estate transaction, from the mortgage broker to the real estate broker to the settlement agent to the creditor. That’s what makes TRID different than a lot of the other rules that the CFPB has issued. The Ability-to-Repay/QM rule is essentially a creditor rule. The loan originator rule is very focused on originators and how they are compensated. Servicing rule is focused on servicers. This rule basically affects everyone.

There is a range of challenges that go from technical details about populating the form to fundamental business process questions, which I think tend to be the most challenging operationally. These questions require lenders to rethink how to structure everything from application intake processes, to adapting to more complicated rules regarding tolerances, to new timing requirements for the LE and CD, and various other issues.

For wholesale lenders, what I think is the most challenging is the front end application intake to Loan Estimate stage. Instead of designing your own application intake process that you’re in control of, you can train your people around and you can very closely monitor, you are outsourcing that function to a third party. You will not be able to control the application flow on your own system; nor will you know exactly when the application has been submitted each time. You also won’t be generating the Loan Estimate yourself and making sure the estimates are good and reliable, based on the best information you have. Rather, for each application you’re going to be turning that over to third parties and different third parties at that. So the biggest challenge is how to manage that process. How to make sure that your third party LOs are taking applications in a manner that is acceptable to you, your investors, and to the regulators. How to make sure you know that they are actually complying with the timing requirements and producing the Loan Estimates on time, and that the estimates they are providing are good and based on the same information that you would use—because you’re ultimately going to have to honor the estimate they’ve given and will be liable for the disclosures that they’ve given.

Those are challenges, but there are different ways of dealing with them. One is to closely monitor who you’re doing business with. Another way is to mitigate your risk somewhat and take more of the responsibility yourself as the wholesaler. You could accomplish this by letting the broker take the application, but as soon as the broker has an application, sending it to you and generating your own Loan Estimate. That’s one approach some people in the industry are doing and there’s nothing wrong with that. But you basically need to have realtime information if that’s what you’re going to do, because you’re still going to be on that 3-day clock that starts when the broker has received the application. In other words, you still will need to produce an estimate within the same time frame that the broker would have, so any lag in information flow could be a challenge for you.

The alternative is allowing the broker to provide the Loan Estimate for you. The rule does allow some flexibility for brokers to just take applications and generate Loan Estimates without a specific creditor in mind and leave the creditor’s name blank. That’s something you can do, but again, there’s more risk on your end doing business that way because it’s harder to monitor whether or not the estimates were really made according to what estimates and terms you would use if you are just taking an estimate a broker provided that wasn’t even really done with you in mind.

There are different ways of attacking that issue but the biggest challenge is really getting from application to Loan Estimate in a compliant manner and making sure the estimates you’ve been given and running with are reliable and good.

This transcript has been edited from the May 2015 round table discussion for clarity and completeness.

Answered By: Andy Arculin

Is there any chance the CFPB will delay the August 1 implementation date?

I think this question came up every time I did a panel on behalf of the CFPB. The answer I always gave was a firm “no,” and that directive came from up high. I think Rich Cordray has said the same thing several times when he’s been out speaking as well. And, to give a little flavor to this, the thinking at the CFPB has always been that yes, they do appreciate TILA-RESPA is a massive implementation effort. I’ve heard it described as five times of all of Title 14 and I don’t think that’s wrong. The CFPB gets that. But the prevailing viewpoint has always been that normally a year is enough time to implement a new rule, even a big one. The CFPB gave 18 months for TRID and even started the 18 month clock after Title 14 had taken effect. So basically, they gave the industry time to finish up all of the last round of rules and then gave an additional six months to do TILA-RESPA. The Bureau has always viewed that as more than enough time, and I would not expect that they will delay the effective date, no matter how many times they’re asked.

There have been discussions of some alternatives. One idea that’s been kicked around is delayed enforcement of the final rule, or basically, a good-faith compliance standard for examinations and enforcement where the CFPB will say they’re not going to come after everyone for technical violations of the rule. That may well be where they ultimately land, but the caution that I always give is the concept of private liability. If the Bureau were to do that, if the Bureau were to say, we’re not going to start examining you for X number of months, and when we do, we’re only looking for good-faith compliance. In the meantime, our enforcement people aren’t going to come after you unless you’re doing something willful or knowledgeable. That’s all well and good from the CFPB. But there’s still the possibility that someone files a civil lawsuit and you just go before a court and you’re litigating in court over a TILA violation. I think the Bureau would have to do something formal – something through an amendment of the rule – or there would have to be some kind of legislative act in order to stop that from happening. I don’t mean to say that I think people are going to start filing lawsuits on day one, but it’s possible, there’s exposure there, there’s risk. And if anyone is banking on the Bureau not coming after them as a green light for non-compliance, they would still be at risk of someone filing a civil lawsuit. And I think that would be the worst-case scenario: someone files a TILA lawsuit and you’re not complying with TILA and then you lose a case in court. I think that’s probably worse than getting dinged by an examiner. So I always caution people that that question is still going to be out there regardless of what the Bureau does, unless the Bureau does what I think they’ve been very clear that they won’t, and that’s delay the effective date. So, moral of the story is that there’s no choice but to be ready by August 1.

This transcript has been edited from the May 2015 round table discussion for clarity and completeness.

Answered By: Andy Arculin

Can you address guidance, or a lack thereof, regarding one-time-close construction programs and the closing disclosure specifically?

The CFPB put out examples of several different types of transactions and did not put out any examples of single-close construction-to-permanent loans. There are some challenges I’m aware of for completing the form. The projected payment table can be hard to do for a single-close construction-to-permanent loan. However, the Bureau has always had a view that even for a loan that’s only technically closed once, a construction-to-permanent loan can be disclosed as two separate transactions for disclosure purposes. I think some people don’t like that and it’s a practical challenge. But the construction phase technically can be disclosed as one transaction and the permanent phase as another, and that eliminates a lot of the problems. That’s basically where the Bureau left it–the Bureau has never come out and given an example of how to do the projected payments table or anything else with the single-close construction-to-permanent disclosed as one transaction. I think there’s a belief, right or wrong—maybe wrong—that the market would basically elect to do two disclosures. And that’s why in the May webinar the Bureau was talking about 12 C.F.R. 1026.17(c)(6), which is old news (it explains a construction-to-permanent loan can be disclosed as two transactions). Of course, that doesn’t make it any easier for people who want to do one disclosure. They certainly are allowed to, it’s just a matter of figuring it out.

Answered By: Andy Arculin

Please clarify your comments on the property tax tolerance category. Which is the correct category?

Under the rule, tolerances are actually structured differently than they were under Reg X. Reg X, which implemented the previous disclosures, the GFE and the HUD-1, basically carved out charges and placed them in the zero percent, 10 percent categories. Whereas TRID makes the zero percent category the default category, and basically then carves things out of the zero percent category into the 10 percent category, or the category of charges that are not subject to a specific tolerance, the no tolerance category. And a lot of typical charges are included in that no tolerance category, like the escrows, and the prepaid interest and such, but unfortunately, one such charge that was left out expressly are the pre-paid property taxes. So, pre-paid property taxes are not expressly carved out into any particular category, the 10 percent or no tolerance, and so arguably, they’ve then fallen under zero percent tolerance under the plain language reading of the rule.

The CFPB has clarified in informal guidance though, and they’ve given this guidance out in public settings such as MBA’s regulatory conference and such, so they’ve stated this to many hundreds of people. In their view, prepaid property taxes are not subject to zero percent tolerance because they are not charges that are required by the creditor, they are property taxes that are required by the government entity in which the property is located, and they have to be paid regardless of whether the borrower is taking out a loan or not, and so in their view it’s not a charge that’s subject to tolerance.

There actually is an element of the no tolerance category, which is, charges not required by the creditor. So there is some support for that interpretation, and so some lenders have been following that, I think reasonable interpretation of the Bureau, but some lenders and investors decided to take a more conservative route and apply zero percent tolerance to it.

[Note from Richard Horn: the CFPB formally stated its interpretation in a Federal Register notice it published on February 10, 2016.]

Answered By: Richard Horn

How should we, a title company, handle the situations where the lender is directing us to prepare the CD in a way that we know is incorrect?

This is a great question, it’s something that unfortunately is not described in the preamble of the rule, it’s not something that’s in any of the regulatory provisions, and it’s something that is really of concern to settlement agents. Because there are a lot of misunderstandings about how to comply with TRID and actually there are probably a lot of cases where a settlement agent might understand the way the rule is intended, might understand the correct way to comply with the rule, and the lender might have a misunderstanding about it.

But the lender might still require under their closing instructions for the disclosure to be disclosed incorrectly because of their misunderstanding and the question then comes up, is the settlement agent subject to potential administrative liability for that violation.

Hopefully that’s something that the CFPB does, at some point in the future, provide some guidance on for settlement agents. I know the HUD FAQ’s previously did talk about some agents’ responsibility with respect to tolerance violations for the GFE and the HUD-1 and so there is some precedent for a regulatory agency giving some guidance about these types of situations where the lender might have a violation that the settlement agent is really just a part of because they are following the lender’s instructions.

I think the best thing for settlement agents to do is to document that they informed the lender of their interpretation and that the lender decided to still follow through with the lender’s interpretation, and then keep that in their own file. Because if there is any potential administrative liability I think that would probably be taken into account by an examiner.

Answered By: Richard Horn

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